Business Models

by Mike Masnick

Filed Under:
business models, free, freemium, software

Once Again, Freemium Often Isn't A Good Model, But That Doesn't Mean 'Free' Doesn't Work

from the thinking-through-business-models dept

Since we talk a lot about the use of "free" in business models, it's common for people to assume that we love any and all business models that use "free." In particular, one assumption is that we think all "freemium" business models are great. However, that's simply not the case. What we're talking about here is how and when to use free in a business model. The important thing to recognize there is that when we're talking about free, it's in trying to figure out where it makes sense in the business model -- not to say that "everything should be free" or that "any business model that uses free is great." Yet, often, people seem to assume that we think any business model that has "free" is wonderful. The unfortunate result of this is that any time someone uses free as a part of a business model and it's not effective, people think they've "debunked" what we have to say.

For example, last year, we wrote up a post explaining why so-called "freemium" business models probably are not a good idea for many software startups. There are some it can work for (and work really well, as Evernote continues to show), but it really doesn't make much sense for a lot of others. That focused on a link from a software startup founder who found that freemium didn't work for him. There's now a similar post from the creator of the popular Instapaper app, talking about why he's pulled the free mobile version of Instapaper, hitting on many of the same points that we raised with the initial post about why Freemium just isn't right for certain businesses (especially software). The only reason I saw this was because Dave Harper pointed us to it, suggesting that it might debunk some of our positions -- though Dave was very cool about realizing the difference once I pointed him to our earlier post.

However, I really think it's important to highlight this particular issue, because it's one that comes up a lot: when talking about the importance of free as a part of a business model, that does not mean that all "free"-based business models work, or are even good ideas at all. What's important is to recognize when and where free makes sense and where it doesn't. "Freemium" business models for software can be tough, though it very much depends on the specific software and service being offered. It's very difficult to figure out what should be free and what should be premium, and quite frequently people underestimate just how few of the free users will ever switch over.

But none of that means that all free business models (or even all freemium) business models don't make sense. We've always tried to drive home the idea that there are no cookie cutter business models in the digital world, and it's important to understand the underlying economics to better understand where free might fit as a smart piece of your business model.

I think the worst thing about the focus on things like "freemium," or even the intense focus on the word "free" itself, is that it often leads to cases where people can't get past the "free" part, and when the larger business model fails, they blame the "free" part, rather than recognize that perhaps it was the way "free" was used as a part of the business model that was the problem.

Reader Comments (rss)

(Flattened / Threaded)

  1. icon
    fogbugzd (profile), May 5th, 2011 @ 6:10am

    I just changed from a free to paid user of Evernote yesterday. I have tried several other services like it, but evernote is the first that I found myself using every day. They keep adding to the service and making it more useful and thus more valuable to me. They also do a good job of CwF. But I would never have never started using Evernote if I had to pay.

    reply to this | link to this | view in thread ]

  2. icon
    velox (profile), May 5th, 2011 @ 6:18am

    Evernote got it right

    I used Evernote for a few months in free mode, and it became obvious that this is a really useful service. From there it was a no-brainer to move to the paid mode because I knew I would use it frequently. I've been a paying customer for 2 years now, and still think its great. I do have a few quibbles, but it remains an essential way for me to keep track of things.

    reply to this | link to this | view in thread ]

  3. identicon
    Kevin, May 5th, 2011 @ 6:32am

    The Real Problem

    ...with many "freemium" business models that I've encountered is that the free version of the app is diminished to the point of being unusable or extremely annoying.

    A lot of designers seem to fear users not realizing there is a "better" paid version available so much that they turn their free offering into nagware. Thus, rather than reminding end users that they could "upgrade" for a better experience by getting more features, it seems more like demanding payment for the experience of using the program without clicking through bothersome popups or useless "warnings."

    This is perhaps part of a larger problem with software/IP that could explain some of the bizarre assumptions and claims of supporters of things like the DMCA. There are a lot of things we put up with in the online/software/computer world that simply wouldn't fly in the "real" space. This is one of them. I mean, I've met some pushy salesmen before, but can you imagine (e.g.) a car salesman asking you to sign a form every five seconds establishing your agreement that owning the car and driving it every day would be better than simply test driving it or sitting in it at the lot? Or a realtor refusing to show you the dining room because that's for homeowners only?

    reply to this | link to this | view in thread ]

  4. icon
    NotMyRealName (profile), May 5th, 2011 @ 6:46am

    Re: The Real Problem

    What would be a much better solution than pop ups and nagware?

    keep the full ui from the pay version in the free version. 'grey out' the pay-for functionality in the buttons and menus. In the online or in program help faq, explain that the 'reason to buy' features are unavailable in the free version.

    No pop-ups or customer irritation required, and the customer would form a stronger attachment to the expanded features (that they would use) than they would from a list in a pop-up or on the companies website.

    reply to this | link to this | view in thread ]

  5. identicon
    0, May 5th, 2011 @ 6:55am

    "'s common for people to assume that we love any and all business models that use "free."...".

    You seem to take the lesson from Apple; if you public doesn't agree with you tell them they are confused. But the truth is you often just don't understand the criticism.

    reply to this | link to this | view in thread ]

  6. icon
    Jay (profile), May 5th, 2011 @ 7:02am


    "You seem to take the lesson from Apple; if you public doesn't agree with you tell them they are confused. But the truth is you often just don't understand the criticism."
    Most people understand the distinction quite well of using free as a business model, and using free as a way to "pay and pray".

    People also understand, in their own way, when they're being lied to, and when something used for business needs, entertainment, or otherwise is not worth their time to invest.

    What you seem to say is that people can't make up their own minds about a service that works for their needs. You should realize:

    People are not as dumb as you think they are.

    reply to this | link to this | view in thread ]

  7. identicon
    Adam G, May 5th, 2011 @ 7:03am

    I agree completely.

    I don't mind paying more for some software, but a lot of times the split/divide between free and premium just doesn't do it for me.

    What bothers me most, for the software side of things, is when a program does so many things, except the 1 thing I want it to do. There is almost never a realistic way to make a suggestion that will get listened to. For I feel that what if I may the only person who knows or wants this feature. Does that mean they shouldn't add it? Even though it adds more value and may in turn spur others to use the feature if its there? (I am aware that as a developer/business you must grab the massive low hanging fruit first, but sometimes I feel they could do things better)

    reply to this | link to this | view in thread ]

  8. icon
    Chris in Utah (profile), May 5th, 2011 @ 7:52am

    Idea that any software developer can use the following method.

    1. 30 day trial
    2. 30 more days on confirmed referral
    3. 15 days for there 3rd-tier referrals
    4. Minimal monthly or life-time licenses are up to the software's life-cycle.

    Take advantage of free distribution and word of mouth. Some pyramid affiliate methods do work.

    reply to this | link to this | view in thread ]

  9. icon
    Chris in Utah (profile), May 5th, 2011 @ 7:55am


    This is why people are waking up to opensource projects. If there is value to be added you can make a request to the development or in most cases add-on teams.

    Firefox I need to say is at the top of the prime examples. As for the related post that just hit and Gimp, ect. as replacements for Adobe.

    reply to this | link to this | view in thread ]

  10. icon
    fogbugzd (profile), May 5th, 2011 @ 8:42am


    >>any software developer can use the following method
    >>1. 30 day trial

    I disagree. Take Evernote as an example. First, I would not want to start using that type of software on a 30-day basis. The essence of the program is saving a lot of material for the long term. I never would have started using Evernote in the first place if I knew I would likely to be cut off after 30 days.

    If you read about the philosophy behind Evernote marketing they want their free users to build the product into their everyday routines. That takes time, and the time varies greatly from user to user. My own history had a series of ups and downs in using the product. For me, the turning point was bumping against the monthly upload cap. Personally, I think the monthly upload cap is a brilliant divide between free and premium use for Evernote. If you are bumping against the cap, then you are indeed a serious user. Other products like Dropbox and Snapdraggon have absolute storage amount limits. I had bumped against those, and wasn't motivated to pay. I just deleted old things and moved on. But with Evernote the amount of uploading you do on a daily basis is the key to making the system useful, and that is where they charge for enhanced service.

    I think one of Mike's points about freemium models is that there is no one system that will work for everything, not even within one industry. That frustrates some people who want one set of simple rules that guarantee success. That isn't going to happen.

    I don't want to hammer on you, but the other thing that is wrong with your model is that there is no "CwF" component. The Evernote guys are out there. They talk to their customers with regular podcasts that are cheesy but informative. They go to a lot of trade shows across many industries and talk to people. Most important, they listen to their customers and implement features the customers are asking for. In a freemium model that sort of thing is at least as important as having a reasonable fee structure that is appropriate for your business.

    reply to this | link to this | view in thread ]

  11. icon
    Overcast (profile), May 5th, 2011 @ 9:00am

    Have a bit of extra money this week. I spent it on a couple things....

    New TV. If I couldn't see a free demo - I wasn't going to buy that model. YES, I watched a SONY BRAVIA TV FOR FREE AT THE STORE!!! But I bought it.

    Games - wanted a couple new games. One major requirement - is there a free trial? If yes; then I'll check it out and maybe buy, if not - no dice, no thanks.

    Also I heard some music on the radio FOR FREE. Since I liked that group that I heard FOR FREE, I bought a CD.

    Hmm.. 'Free' is relative. I don't care to buy things I know nothing about. Who does?

    reply to this | link to this | view in thread ]

  12. identicon
    Jarrett Streebin, May 5th, 2011 @ 9:07am


    Perfect freemium success model: Zynga. All games are freemium and they make an enormous amount of money.

    reply to this | link to this | view in thread ]

  13. identicon
    Anonymous Coward, May 5th, 2011 @ 9:51am


    I agree. Some games rely on the fact that they they do not have demos so you know they suck only after you paid. If i can't get a demo I'll torrent it. If i like the game then I'll buy it. It's not a lost sale it's a lost "sucker who we could not lure into paying us for a shitty game". I pirated minecraft and loved it so much I bought 3 copies

    reply to this | link to this | view in thread ]

  14. icon
    Chris in Utah (profile), May 5th, 2011 @ 12:12pm

    Re: Re:

    As for caps there subjective as hell not to mention taking value away by your own admission the "the [limited] amount of uploading you do on a daily basis is....". So in reality, not essence, let you see it in action but not give you it all. Its odd timing but I had the same thought in a game in beta right now Fortune Online. If your curious on the model I suggested there see Energy and economics in there suggestion forums.

    Also 30 days isn't set in stone and I did mention software life-cycle flexibility.

    As for connecting with fans. Didn't feel the post warranted a full business model just a foundation. In ex. one that moves like earthquake rollers on a software life-cycle.

    reply to this | link to this | view in thread ]

  15. icon
    Chris in Utah (profile), May 5th, 2011 @ 12:16pm

    Re: Re:

    Reminds me of the Insightful/funniest for last week... dam i forgot which one. That mean "Not a sucker" is a new category? I like it.

    reply to this | link to this | view in thread ]

  16. icon
    Chris in Utah (profile), May 5th, 2011 @ 12:19pm

    Re: Disagree on Disagree

    Try getting an issue resolved with community abuse is a joke though. There Connecting with fans is seriously lacking and to the point where if your in a community game such as.. oh all of them ya better find your table by your clique of people. Zynga has been on my s-list for quite a while.

    reply to this | link to this | view in thread ]

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